India: Eligibility of German limited partnership for treaty benefits

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India: Eligibility of German limited partnership for treaty benefits

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Rajendra Nayak


Aastha Jain

Tax treatment of hybrid or fiscally transparent entities has always been a contentious issue when it concerns the issue of availing benefits of a tax treaty in India. The Bombay High Court (HC) recently ruled, in the case of the Chiron Bearing Gmbh & Co (taxpayer) [TS-12-HC-2013(BOM)], on the eligibility of a German limited partnership (LP) to claim tax benefits under the India-Germany tax treaty.

The taxpayer offered to tax its income in the nature of royalty and fees for technical services (FTS) from India at a lower rate of 10% by invoking the treaty. Under the treaty, a person who is a resident of one or both of the contracting states can claim the benefits. A resident is defined under the treaty to mean a person which is liable to tax in a state by virtue of its domicile. Further, "person" includes any entity treated as a taxable unit in Germany.

Under the German tax laws, the taxpayer was treated as a fiscally transparent entity and its income was taxed in the hands of its partners. However, it was liable to pay "trade tax" in Germany, a tax levied on its profits. Further, the taxpayer held a tax residence certificate (TRC) issued by the German authorities certifying that the taxpayer was liable to pay trade tax in Germany.

The HC observed that trade tax paid in Germany is one of the taxes covered under Article 2 of the treaty and the taxpayer is filing trade tax returns in Germany. Hence, the taxpayer is paying tax to which the treaty applies. Furthermore, the TRC issued by the German Authorities evidences the fact that the taxpayer is considered as a taxable unit under the taxation laws of Germany.

The HC held that the taxpayer was entitled to treaty benefits and the lower withholding tax rate applicable to royalty and FTS under the treaty cannot be denied. Reliance placed by the Indian Tax Authority on OECD publications to deny treaty benefits was not sustained as the entire issue was specifically governed by the treaty.

Rajendra Nayak (rajendra.nayak@in.ey.com) & Aastha Jain (aastha.jain@in.ey.com)

Ernst & Young

Tel: +91 80 4027 5275

Website : www.ey.com/india

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